The impact of ifrs adoption and banking reform on earning management (a case study of first bank)

Thesis Overview

<p> <b></b></p><p><b><b>INTRODUCTION</b></b></p><p><b><b></b></b></p><b><b><p><b>1.1 &nbsp; Background of the<br>Study</b></p><p>Globalization of capital<br>markets requires a unified global accounting, reporting and disclosure set of standards.<br>As a result of increasing volume of cross border capital flows and the growing<br>number of foreign direct investments via mergers and acquisitions in the<br>globalization era, the need for the harmonization of different practices in<br>accounting and the acceptance of worldwide standards has arisen. This worldwide<br>standard is International financial reporting standards (IFRS). Although, there<br>has been series of contentions as regarding the impact of this standard on the<br>quality of financial statements, but this study will provide a clear<br>understanding of their relationship.</p><p>International Financial<br>Reporting Standards (IFRS) is a set of principle –based issued and established<br>by International Accounting Standards Board (IASB) and generally accepted by<br>different countries around the world to ensure comparability and transparency<br>in accounting practice (Desoky and Mousa, 2014).The establishment of such<br>standards by IASB aimed at achieving harmonization and promotion of financial<br>practices to ensure consistency in reporting format across countries which<br>should minimize cost of processing financial information to investors and<br>improving efficiency of capital markets (Wen et al, 2011). Recently around the<br>world more than 120 countries and reporting jurisdictions required domestic<br>listed companies to prepare their financial statements in accordance with IFRS<br>(Mousa and Desoky, 2014). The adoption and implementation of IFRS has been one<br>of the most important events in accounting history of different countries around<br>the world which induce significant changes in the financial practices<br>(Kousenidis, et al, 2010). However, changes are found to vary among countries<br>and reported to be more serious in countries that had a code-law accounting<br>system (Ball et al., 2000). Before implementation of IFRS, existed accounting<br>system affected by severe government and legalistic influences which is in<br>contrast with a common-law accounting system countries like North America<br>(Kousenidis, et al, 2010). In a common law accounting system there is a proper<br>description of IFRS and accounting is mainly affected by the market<br>practitioners (Ball et al., 2000). With growing acceptance of IFRS by different<br>countries around the world, many researchers aimed to find out empirically<br>whether the new accounting standards has improved the quality of financial<br>statements that is reported to the users. Furthermore, banks’ ability to<br>engender economic growth and development depends on the health, soundness and<br>stability of the system. The need for a strong, reliable and viable banking<br>system is underscored by the fact that the industry is one of the few sectors<br>in which the shareholders’ fund is only a small proportion of the liabilities<br>of the enterprise. It is, therefore, not surprising that the banking industry<br>is one of the most regulated sectors in any economy. It is against this<br>background that the Central Bank of Nigeria, in the maiden address of its<br>current Governor, Prof. Charles Soludo, outlined the first phase of its banking<br>sector reforms designed to ensure a diversified, strong and reliable banking<br>industry. The primary objective of the reforms is to guarantee an efficient and<br>sound financial system. The reforms are designed to enable the banking system<br>develop the required resilience to support the economic development of the<br>nation by efficiently performing its functions as the fulcrum of financial<br>intermediation (Lemo, 2005). Thus, the reforms were to ensure the safety of<br>depositors’ money, position banks to play active developmental roles in the<br>Nigerian economy, and become major players in the sub-regional, regional and<br>global financial markets. The key elements of the 13-point reform programme<br>include: Minimum capital base of N25 billion with a deadline of 31st December,<br>2005; Consolidation of banking institutions through mergers and acquisitions;<br>Phased withdrawal of public sector funds from banks, beginning from July, 2004;<br>Adoption of a risk-focused and rule-based regulatory framework; Zero tolerance<br>for weak corporate governance, misconduct and lack of transparency.</p><p>On the other hand Earnings<br>management has been an issue of continuous concern for several years for<br>regulatory bodies and accounting practitioners. For example, Hadani, Goranova<br>and Khan (2011) argue that earnings management increases information asymmetry<br>and negatively impacts the quality of financial reports. Earnings management is<br>said to be the reasons for low quality of reported information. It is the<br>choice of a manager among accounting policies which allow achieving some<br>specific objectives (Scott, 2003). Managers use flexibilities within the<br>accounting standard to choose accounting methods, policies and estimates in<br>reporting process to reflect firm’s future prospect (Shehu,<br>2013).Thus the very nature of accounting accruals gives managers a great<br>deal of discretion in determining the earnings in any given period. Managers can<br>apply legal and permitted accounting methods or practices which inevitably<br>impacting negatively on earnings quality Presently, many countries have<br>replaced national accounting Standards by IFRS in order to make local<br>accounting system more transparent, reliable, relevant, understandable and more<br>importantly to enhance financial reporting quality. However, the process of<br>IFRS implementation varies significantly from country to country due to<br>political, cultural, economic, legal and institutional factors. Nigeria and<br>many developing countries are characterized by weak institutions and volatile<br>economic and political environment which are not very conducive for effective<br>implementation of IFRS (Tanko, 2012). It is to this regard that study examines the impact of IFRS<br>adoption and banking reform on earning management using first bank as the case<br>study.</p><p><b>1.2 STATEMENT OF THE PROBLEM</b></p><p><b></b></p><b><p>The Nigerian banking sector<br>witnessed dramatic growth post-consolidation. However, neither the industry nor<br>the regulators were sufficiently prepared to sustain and monitor the sector’s<br>explosive growth. Prevailing sentiment and economic prevailing attitude all<br>encouraged this rapid growth, creating a blind spot to the risks building up in<br>the system. Empirical accounting researches have been conducted to<br>examine the impact of IFRS adoption and banking reform on earning management<br>and determine the extent to which IFRS provide additional relevant information<br>and improve the information content of financial statement prepared in line<br>with these standards. Prior studies have so far presented mixed results as some<br>studies found an improvement in financial reporting quality after IFRS adoption<br>and widely support the hypothesis that earnings management declined<br>considerably after IFRS adoption (Cai, Courtesney &amp; Rahman, 2008;<br>Aussenegg, Inwinkl &amp; Schneider, 2008).</p><p><b>1.3 AIM AND OBJECTIVES OF STUDY</b></p><p><b></b></p><b><p>The main aim of<br>the research work is to determine the impact of IFRS adoption and banking<br>reform on earning management. Other specific objectives of the study are:</p><p>1) To examine the impact of<br>International Financial Reporting Standards IFRS on the rate of reform in First<br>Bank Plc Nigeria.</p><p>2) To examine the benefits of International<br>Financial Reporting Standards IFRS in First Bank Plc Nig.</p><p>3) To analyze the relationship<br>between International Financial Reporting Standards IFRS and earning<br>management in first bank Nigeria Plc.</p><p><b>1.4 RESEARCH QUESTION</b></p><p><b></b></p><b><p>The study came<br>up with research questions so as to ascertain the above stated objectives of<br>the study. The research questions for the study are:</p><p>1) What is the impact of<br>International Financial Reporting Standards IFRS on the rate of reform in First<br>Bank Plc Nigeria?</p><p>2) What are the benefits of International<br>Financial Reporting Standards IFRS in First Bank Plc Nig?</p><p>3) What is the relationship<br>between International Financial Reporting Standards IFRS and earning<br>management in first bank Nigeria Plc?</p><p><b>1.5 STATEMENT OF RESEARCH HYPOTHESIS</b></p><p><b></b></p><b><p><b>Hypothesis 1</b></p><p><b></b></p><b><p>H0:<br>there is no significant relationship between International Financial Reporting<br>Standards IFRS and earning management in first bank Nigeria Plc</p><p>H1: there<br>is significant relationship between International Financial Reporting Standards<br>IFRS and earning management in first bank Nigeria Plc</p><p><b>Hypothesis 2</b></p><p><b></b></p><b><p>H0: International<br>Financial Reporting Standards IFRS has no impact on the rate of reform in First<br>Bank Plc Nigeria</p><p>H1: International<br>Financial Reporting Standards IFRS has impact on the rate of reform in First<br>Bank Plc Nigeria</p><p><b>1.6 SIGNIFICANCE OF STUDY</b></p><p><b></b></p><b><p>The following provided a<br>functional significance for this study:</p><p>1) The findings from this study<br>will be very useful for business managers particularly banks in the<br>understanding of the relationship between international financial reporting<br>standards IFRS, Banking reforms and earning management.</p><p>2) This research will be a<br>contribution to the body of literature in the area of international financial<br>reporting standards IFRS and Banking reforms and earning management in Nigerian<br>banks, thereby constituting the empirical literature for future research in the<br>subject area.</p><p><b>1.7 SCOPE OF THE STUDY</b></p><p><b></b></p><b><p>This study is<br>limited to First Banks Plc in Nigeria. It will also cover the relationship<br>between international financial reporting standards IFRS, banking reforms and<br>earning management in Nigerian banks.</p><p><b>1.8 LIMITATION OF STUDY</b></p><p><b></b></p><b><p><b>Financial constraint</b>– Insufficient fund tends to<br>impede the efficiency of the researcher in sourcing for the relevant materials,<br>literature or information and in the process of data collection (internet,<br>questionnaire and interview).<b></b></p><b><p><b></b></p><b><p><b>Time constraint</b>– The researcher will simultaneously engage in this<br>study with other academic work. This consequently will cut down on the time<br>devoted for the research work.</p><p><b>1.9 DEFINITION OF TERMS</b></p><p><b></b></p><b><p><b>BANK REFORM: </b>make changes in first bank<br>in order to improve the performance.</p><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>&nbsp;</b></p><p><b></b></p><b><p><b>REFERENCES</b></p><p>Ball, R., &amp; Brown, P.<br>(1968).An empirical evaluation of accounting income numbers. Journal of<br>Accounting Research, 6(2), 159-178.</p><p>Desoky, A.M., and Mousa,<br>G.A. (2014).The value relevance and predictability of IFRS accounting<br>information: The case of GCC stock markets. International Journal of Accounting<br>and Financial Reporting,4 (2)</p><p>Kousenidis, D., Ladas, A.<br>and Negakis, C. (2010).Value relevance of accounting Information in the preand<br>post-IFRS accounting periods. European Research Studies,VIII (1)</p><p>NSE (2014).Market<br>Capitalization. [Online] Available: <a target="_blank" rel="nofollow" href="http://www.nse.com.ng/Pages/default.aspx?c=MARKCAP">http://www.nse.com.ng/Pages/default.aspx?c=MARKCAP</a>.</p><p>Vishnani S., and Shah B.<br>K.,2008, Value relevance of published financial statements- With special<br>Emphasis on Impact of cash flow reporting”, International Research Journal of<br>Finance and Economics, 17, 84-90.</p><p>Wen Q, Fong,M and<br>Oliver,J.(2012). Does IFRS convergence improve quality of accounting<br>information?. – Evidence from the Chinese stock market. Corporate Ownership<br>&amp; Control,9(4).</p></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b></b> <br><p></p>